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Derivatives

Vols Fall As Dollar/Yen Fluctuates

The cost of U.S. dollar/yen options slid into single digits last week after spot steadied at a fraction under JPY125. One-month implied volatility fell to 9.6% Thursday, down from 10.5% the week before. The yen hit a peak of JPY125.05 Wednesday, which was a significant level as there was a build up of options with strikes at this level, noted one trader in New York. The spot rate's immediate reversal to JPY124.25 caused implied volatility to fall, however, traders are bullish on the dollar strengthening and expect one-month vol to jump back into double figures in the short term.

Traders had been buying dollar calls/yen puts for several weeks, but last week saw traders selling these positions. For medium and long-term options, there is still demand for dollar calls/yen puts, however most houses are flat one-month maturity options, according to the trader.

Michael Lewis, senior currency strategist at Deutsche Bank in London, was similarly bearish on the yen. There will continue to be a focus on the growth differential between the U.S. and other regions, with the U.S. expected to streak ahead of Europe and Japan, he noted. Lewis predicted the dollar would climb to JPY127.10 in around a month. Implied volatility, meanwhile, is expected to climb around Oct. 30, as a result of speculation over the results of a meeting the Bank of Japan has scheduled.

USD/JPY Spot & One-Month Implied Volatility

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